Treatment of PFI capital expenditure in a Departmental budget
19. Just as the capital values of most PFIs are invisible to the national debt statistics, the capital expenditure that PFI delivers will similarly not impact on Departmental capital budgets. Depreciation charges to Departmental current budgets will also be avoided in such cases. The benefit of using PFI for capital investment which does not score in capital budgets is clear to organisations who use PFI.

The sale of equity is significantly higher than that the sales identified in the HM Treasury PFI equity database and estimated by the National Audit Office. The ESSU PPP Equity Database identifies:— 240 PPP equity transactions involved 1,229 PFI projects (including multiple sale of some projects) valued at £10.0 billion.

— Average profit was 50.6% (compared to average operating profits in PFI construction companies of 1.5% between 2003-09).

— £517.9 million profit from a sample of 154 PFI projects. If the same level of profit were maintained for the 622 PPP project equity transactions the total profit would be £2.2 billion.

— Profits could be as high as £4.2 billion if the same level of profits is obtained by the sale of secondary funds as in the direct sale of equity in PFI companies.

— Two sectors had higher than average profits, health (66.7%) and criminal justice (54.9%) with transport (47.1%) and education (34.1%) below average.

Private Finance Initiative (PFI) funding for new infrastructure, such as schools and hospitals, does not provide taxpayers with good value for money and stricter criteria should be introduced to govern its use, the Treasury Select Committee has concluded in a new report published on 19 August 2011.

„PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that.

„We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab. PFI should only be used where we can show clear benefits for the taxpayer. We must first acknowledge we’ve got a problem. This will be tough in the short term but it should benefit the economy and public finances in the longer term.

„PFI should be brought on balance sheet. The Treasury should remove any perverse incentives unrelated to value for money by ensuring that PFI is not used to circumvent departmental budget limits. It should also ask the OBR to include PFI liabilities in future assessments of the fiscal rules.

„We must also impose much more robust criteria on projects that can be eligible for PFI by ensuring that as much as possible of the risk associated with PFI projects is transferred to the private sector and is seen to have been transferred.“

Higher borrowing costs since the credit crisis mean that PFI is now an ‘extremely inefficient’ method of financing projects, according to the Committee. Poor investment decisions may continue to be encouraged across the public sector, however, because PFI allows Government departments and public bodies to make big capital investments without committing large sums up front.

The Committee has not seen any convincing evidence that savings and efficiencies during the lifetime of PFI projects offset the significantly higher cost of finance. Indeed, the Report raises concerns that the current Value for Money appraisal system is biased to favour PFIs. It identifies a number of problems with the way costs and benefits for such projects are currently calculated.

Recommendations

Investment could be increased in the long run, the MPs point out, if government capital investment were used instead of PFI. The average cost of capital for a low risk PFI project is over 8%, double that of government gilts. Analysis commissioned by the Committee suggests that paying off a PFI debt of £1bn may cost taxpayers the same as paying off a direct government debt of £1.7bn.

The Committee recommends that:

The Treasury should consider scoring most PFIs in departmental budgets in the same way as direct capital expenditure, adjusting departmental budgets accordingly;

the Treasury should discuss with the OBR the treatment of PFI to ensure that PFI cannot be used to ‘game’ the fiscal rules;

the Value for Money assessment process should be subjected to scrutiny by the NAO;

the Treasury should review the way in which risk transfer is identified.